Japan factory output tumbles most in nearly 1-1/2-years as trade war bites

TOKYO (Reuters) - Japan’s factory output tumbled the most in nearly 1-1/2-years in June, data showed on Tuesday, adding to a slew of indicators suggesting slowing global growth and the bruising U.S.-China trade war were taking a toll on the export-reliant economy.

A bicycle rider rides past a factory at Keihin industrial zone in Kawasaki, south of Tokyo, Japan, August 18, 2016. REUTERS/Kim Kyung-Hoon/Files

The data comes hours before the conclusion of the Bank of Japan’s two-day policy meeting, where the board is expected to scrutinise the impact overseas risks could have on its view the economy will sustain a moderate recovery.

Industrial output sank 3.6% in June, government data showed, more than a median market forecast for a 2.0% drop. It was the worst slump since January 2018, and followed a 2.0% rise in the previous month.

Manufacturers surveyed by the government expect output to rise 2.7% in July and 0.6% in August, offering some hope that solid domestic demand will make up for some of the weakness in overseas shipments.

“Industrial output growth has been moving sideways,” the government said, keeping its assessment on factory output unchanged.

On a quarter-to-quarter basis, output rose 0.5% in the April-June period after dropping 2.5% in the first three months of this year.

Manufacturing activity has weakened across the globe as simmering international trade tensions hurt business sentiment, forcing the International Monetary Fund to cut its global growth forecast and prodding some central banks to expand stimulus.

Japan has seen a similar pattern with manufacturers’ sentiment having worsened, though service-sector activity remains firm as they are less vulnerable to the impact from slowing global trade. A trade row between Japan and South Korea is making matters more difficult for their manufacturers.

Most Asian economies, including Japan, are feeling additional pressure as China’s growth cools to near 30-year lows.

Both Indonesia and South Korea cut their main rates by 25 basis points (bps) this month. And on Wednesday, the U.S. Federal Reserve is widely expected to deliver a 25 bp rate cut.

Yet, with robust domestic demand making up for weak Japanese exports, many BOJ officials see no imminent need to ramp up monetary support, and prefer to save its limited ammunition for when the economy faces bigger problems, sources with its thinking have said.

Japan’s economy expanded an annualised 2.1% in the first quarter but many analysts expect growth to have slowed as the U.S.-China trade row hurts exports. October’s scheduled sales tax hike may also curb consumption, they warn.